don’t stop me now! - eulerhermes.com · -qatar v. saudi arabia, uae, bahrain, egypt (blockade)...

© Copyright Allianz

Economic Research Department

05.04.2018

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ME NOW!

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CYCLE MANAGEMENT, UNCONVENTIONAL

MONETARY POLICY EXIT,

PROTECTIONISM


Global GDP growth forecasts (%) Key assumptions and developments:

1. Brent oil prices at 63 USD/bbl in 2018 and 62 USD/bbl in

2019 with upside risks from rising geopolitical risk. Spot price

end-March 70 USD/bbl.

2. Inflation steady increases towards targets. Worldwide:

+2.5% in 2018 and +2.6% in 2019. Wage-price loop

contained.

3. Slight USD appreciation in the next 6 months (+2.5%).

EUR/USD: End-March 1.24. Forecast: 1.15 at end-2018; 1.18

at end-2019.

4. One to two years of additional growth globally:

i. Higher US GDP growth on the back of very

accommodative fiscal policy;

ii. Europe to enjoy above-potential growth while

political vulnerabilities are high; and

iii. Acceleration in EM to continue.

5. Market volatility to increase as liquidity conditions tighten

softly, rates increase progressively.

6. Mild protectionism while trade growth is expected to grow

by +4.4% this year and +3.8% in 2019.

2019

Latest forecast

Revision(pps)

Latest forecast

Revision(pps)

World GDP growth 2.6 3.2 3.3 0.1 3.1 =

United States 1.5 2.3 2.9 0.3 2.4 0.2

Latin America -1.0 1.2 2.3 = 2.8 =Brazil -3.5 1.0 2.5 = 3.0 =

United Kingdom 1.9 1.7 1.5 0.5 1.2 0.4

Eurozone members 1.7 2.5 2.3 0.1 2.0 =Germany 1.9 2.5 2.5 = 1.9 0.1France 1.1 2.0 2.1 0.2 1.9 =Italy 1.0 1.5 1.4 0.1 1.2 =Spain 3.3 3.1 2.5 0.1 2.3 0.1

Russia -0.2 1.5 1.9 = 1.8 =Turkey 3.2 7.4 4.6 0.6 4.0 0.3

Asia 4.9 5.2 5.0 = 4.9 =China 6.7 6.9 6.5 0.1 6.2 =Japan 0.9 1.7 1.2 = 1.0 =India 7.1 6.7 7.3 = 7.3 =

Middle East 4.7 1.7 2.7 = 3.0 =Saudi Arabia 1.7 -0.7 1.7 = 2.0 =

Africa 1.3 3.2 3.6 0.1 3.7 0.2South Africa 0.6 1.3 2.0 0.6 2.5 0.7

* Weights in global GDP at market price, 2017

NB: The revisions refer to the changes in our forecasts since the last quarterFiscal year for India

2016 2017 2018

Sources: IHS. Euler Hermes. Allianz Research

3

ROOM TO GROW

© Copyright Allianz 4

Russia: additional US and

UK sanctions

October 2018: First

Round of Brazilian

Presidential Elections

July 2018: Mexican

ElectionsModerate Stance will

continue

November 2018:

US Midterm

ElectionsHouse/Senate

majorities remain

largely unchanged

Source: Allianz Research

Trade Games with the

USLimited

NB: In Italic our baseline assumptions

Brexit | October 18

Ireland case,

finalization of Brexit

transition deal and

preliminary trade

negotiations

Election

Season:

Thailand,

Cambodia,

Pakistan,

Malaysia

NAFTA

renegotiations

scheduled to end

or US withdrawal

October 2018:

ECB begins

winding down QE

program

April 2018: Hungarian electionEmergence of CEE populist block

Election

Season: Brazil,

Colombia,

Costa Rica,

Paraguay,

Venezuela

+ Peru

(unexpected) Election Season: Egypt,

South Africa (unexpected)Middle East main tension points:

- P5+1 Iranian deal at stake with Bolton arrival

- Engulfing wars: Yemen, Syria

- Qatar v. Saudi Arabia, UAE, Bahrain, Egypt (blockade)

Italian election

Inconclusive election and

political gridlock

German coalition

undecided on

European reform

POLITICAL HURDLES


WHERE ARE WE IN THE CYCLE?


1 more year to go in the USA before

reaching peak

2 years for the Eurozone China is handling its soft landing

CYCLE: TIMING WILL BE DIFFERENT

6

Sources: Markit. Allianz Research Sources: Markit. Allianz Research Sources: Markit. Allianz Research

Manufacturing PMI sub-components


-5

0

5

10

15

20

25

30

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

12 13 14 15 16 17 18

US (gross operating surplus, 4Q/4Q) - lhs

Eurozone (gross operating surplus, 4Q/4Q) - lhs

China (gross operating surplus, 4Q/4Q) - rhs

7

COMPANIES BENEFIT FROM THE STRONG ECONOMIC CYCLE

Corporates profits

Source: National statistics, Allianz Research

Profitability supports the investment cycle,

but the rise in oil prices and tighter financing

conditions could weigh on companies’

margins

Corporates turnover (manufacturing, 4Q/4Q)

Strong volume growth and better pricing

power helps companies’ turnover

Source: National statistics, Allianz Research

0

2

4

6

8

10

12

14

16

-3

-2

-1

0

1

2

3

4

5

6

7

12 13 14 15 16 17 18

US - lhs Eurozone - lhs China - rhs

Total corporate cash (USDbn)

Source: Bloomnberg, Allianz Research

Companies continued to strengthen

their cash buffers


GLOBAL INSOLVENCIES IN CHECK, EXCEPT FOR CHINA

8

Source: Euler Hermes, Allianz Research

6%

-4%

14%

-5%

7%

3%

33%

6%

-2%

2%

-3%

-3%

5%

31%

-10% 0% 10% 20% 30% 40%

GLOBAL INSOLVENCY INDEX

North America Index

Latin America Index

Western Europe Index

Central & Eastern Europe Index

Africa & Middle East Index

Asia-Pacific Index

2018

2017

Euler Hermes Global and Regional Insolvency Indices(yearly change in %)

Sharp correction due to forceful cleaning

of ‘zombie’ companies in China

Upward trend in major failures continued in 2017: 321

cases (+57 vs 2016), with 42 in Western Europe and 17 in

APAC. Services (+16 cases), Machinery/Equipment (+13),

Retail (+10) and Agri-food (+10) lead the pack

(*) Companies with a turnover exceeding EUR50mn

Source: Euler Hermes, Allianz Research

Major failures* (number of companies by sectors)

2018 insolvencies (yearly change in %)

8


Monetary and financial conditions were slightly

restrictive in Q4 17. Easing in emerging markets and

the US more than offset by tightening in Euro area,

China and the UK

GLOBAL LIQUIDITY EXPECTED TO PROGRESSIVELY TIGHTEN

9

Financial conditions index Central Banks Balance Sheet monthly changes

(flows, USD bn)

Global liquidity will start tapering globally in

Q3 2018

Sources: IHS Global Insight. Allianz ResearchSources: IHS Global Insight. Allianz Research

-80

-60

-40

-20

0

20

40

60

80

07 08 09 10 11 12 13 14 15 16 17 18

EM United KingdomChina JapanUnited States Euro AreaFCI

Tightening

Easing

M2, y/y growth

Sources: IHS Global Insight. Allianz Research

US M2 growth has slowed down since Q3 2016,

while it has levelled off in Europe and Japan.

The US theoretical M1, estimated on the basis

of quantity theory of money, is now above US

money supply (observed M1) 9


INTEREST RATES WILL INCREASE STEADILY BUT SLOWLY

ECB main refinancing rate, 3-month money

market rate and German 10yr government

bond yield (in %)

Federal funds rate & 10-yr

government bond yield (in %)

Sources: IHS, Datastream,. Allianz ResearchSources: IHS, Datastream,. Allianz Research

Higher inflation in the US (2.3% in 2018 vs

2.1% in 2017) and stable inflation in the

Eurozone (1.5% in 2018)

Sources: IHS, Datastream,. Allianz Research

Consumer Price Index

(annual change, in %)

Two more Fed rate hikes in 2018 (3 in

total) and 2 rate hikes in 2019

QE exit by the ECB is expected to be very

progressive: EUR15bn monthly asset

purchases until Jan 2019 and first rate hikes in

H2 2019


FINANCIAL RISKS IN A LATE CYCLE

11

Credit intensity

(units of additional credit needed to generate

1 additional unit of nominal GDP)

2017 – average of the first three quarters


Late cycle growth comes at a higher cost

for the private sector

Volatility

VIX index and Fed Fund Target rate

Bouts of volatility likely in a context of

rate normalization and complacent

markets

Sources: Bloomberg. Allianz Research

Fragmentation

Share of high-yield bond market owned by Mutual

Funds Holdings

Patchy financial architecture or search for

yield just went too far?

Sources: IMF GFSR, Allianz Research


TRADE TO GROW IN SPITE OF PROTECTIONIST RHETORICWorld trade growth (y/y)

Sources: IMF, IHS Global Insight. Allianz Research

Volume growth to remain above +4% in

2018 and slow slightly in 2019

World inflationary pressure index

Inflationary pressure worldwide helped fuel

trade value growth. USD appreciation to

explain 2019 deceleration in value growth


-5

-4

-3

-2

-1

0

1

2

3

12 13 14 15 16 17 18

Unemployment rate

NEER

PPI

Brent

Inflationary Pressure Index

Despite a marked slowdown in 2017.

traditional protectionism remains high.

The US has been the heaviest hitter with

90 new measures rolled out in 2017

401

293

247

185

157 154 152140 137

96

0

50

100

150

200

250

300

350

400

450

US

India

Russ

ia

Germ

any

Arg

entin

a

Sw

itzerl

and

Bra

zil

Indone

sia

Japan

UK

2017. World=467

2016. World=827

2015. World=1023

2014. World=1122

Traditional protectionism measures

Sources: GTA. Allianz Research

12


March 2018: A pivotal moment

• Multilateralism critique and campaign promises• March 8: 25% tariff increase for steel and 10% for aluminum.• March 22: 25% tariff increase on ~USD 60bn of imports from China

triggered a retaliation (15% to 25% tariff increase on USD 3bn of Chinese imports from US)

• April 4: 25% tariff increase on USD 50bn of Chinese imports from US

Déjà vu? Reagan and Bush

• High US protectionism not new: 90 new US protectionism measures out of 467 in 2017; metals second most-affected sector with 54 new protectionist measures

• Signaling effect ahead of elections though US consumer bears costs• Tense moment in the late cycle• Fiscal profligacy (USD300bn of budgeted fiscal spending in bipartisan

budget + USD1.5tn infrastructure plan)

What’s different?

• Trade deficit at its highest since 2008. Stretched value chains, financial balkanization

• High protectionism 3.0 (regulatory, legal, data) on top of local content

& non-tariff barriers. WTO at stake (“national security”).• Old-fashioned tariff style? Deal teams? Trade Games?• Multi-polar world (EU, China, BRICS); Strong FTAs?

US PROTECTIONISM: GHOSTS OF THE PAST

13

Protectionism and average tariff on imports in the US

across time

Sources: WTO, US ITC, Euler Hermes


PROTECTIONISM SCENARIOS

14

Mild protectionismSecluded and resolved

Lingering protectionismExtended and substantial retaliation

Trade warTrade war with strong global retaliation

80% 15% <5%

• Negligible on global trade (>4% volume)

• US growth cut by -0.1pp

• Negligible impact on US inflation

• US current account deficit: -0.6pp to -3.0%

of GDP

• US fiscal deficit: -1.1pp to -4.5% of GDP in

2019

• Europe’s ongoing recovery not impacted

• China remains on soft landing trajectory

• EM continue to benefit from an early

phase of recovery

• Steady increase of US yields. World risk

appetite remains high

• USD REER stable

• Volatility remains depressed (VIX < 20)

• Cyclical and techno equity out-perform

• Emerging debt and equity out-perform

• Global trade slows down (-2pp)


• US inflation durably up by +0.1 pp

• US CA deficit: -0.9pp to -3.3% of GDP(*)

• US fiscal deficit: -1.6pp to -5.0% of GDP

• Europe growth cut by -0.6pp

• China growth cut by -0.3pp

• EM sell-off, recession in some

• US yields stable (higher demand for US

treasuries, anticipation of lower inflation

• USD appreciates by 5%. Decline of oil prices

to 50 USD/barrel

• Higher regime of volatility

• Cyclicals and techno under-perform. Small

caps out-perform, export driven equity

underperform

• Emerging debt and equity under-perform

• Global trade contracts (-6pp from +4%)


• US inflation durably up by +0.4pp

• US CA deficit: +0.7pp to -1.7% of GDP (*)

• US fiscal deficit: -4.6pp to -8.0% of GDP

• Europe growth cut by -1.9pp

• China growth cut by -1pp only on the back

of stabilizing policies

• EM broad recession

• US yields decline (safe haven)

• USD appreciates by 10%. Significant decline

of oil prices to 40 USD/barrel

• Surge of volatility. Strong increase of gold

prices

• Global equity sell-off, US equity out-performs

• Export driven equity underperform

• Burst of high yield emerging debt

Average tariffs to increase by ~ +0.5pp

(to 4% for the US)

Average tariffs higher by +2.5pp to 6% in the

US and 8% globally

Average tariffs higher by +8.5pp to 12% in the

US and 14% globally or 45% against China

Two-year cumulated end-of-period impactTwo-year cumulated end-of-period impactTwo-year cumulated end-of-period impact

(*) Income trade elasticity effect above price trade elasticity effect (*) Income trade elasticity effect below price trade elasticity effect


PROTECTIONISM TRACKER

US trade deficit by country and by sector for top 20 import markets, USDbn(*)

* We consider as sizeable a level of above USD10bn deficit of the US by country and above USD5bn by sector

Total EnergyAgri-

foodTextile Wood paper Chemicals Iron Steel Non-Ferrous

Machinery and

equipmentAutomotive

Electrical

equipment

Electronic

equipmentMiscellaneous

China -312.0 2.0 20.0 -59.4 -49.3 -15.2 -0.3 2.3 -33.3 -1.7 -44.8 -140.3 7.9

Mexico -120.5 10.2 -7.6 -2.1 -5.7 18.5 2.0 2.5 -8.3 -55.4 -24.9 -47.4 -2.3

Germany -62.9 0.7 0.7 -0.6 -0.5 -12.2 -1.1 -0.6 -20.6 -21.4 -5.1 -6.4 4.1

Japan -61.1 2.4 12.0 -0.1 0.0 1.1 -1.5 0.6 -21.0 -44.6 -6.8 -4.9 1.7

Canada -57.0 -41.2 -10.0 1.0 -5.3 4.4 0.3 -7.7 7.9 -21.0 4.2 3.5 6.7

Vietnam -29.8 0.0 0.5 -15.8 -4.6 0.0 -0.4 0.1 -0.4 0.1 -1.1 -8.8 0.7

South Korea -27.7 -0.4 5.7 -1.0 -0.3 -0.8 -2.1 0.5 -2.0 -20.8 -3.2 -7.1 3.9

Italy -26.8 0.4 -3.2 -4.2 -1.3 -2.9 -0.6 0.4 -9.8 -3.2 -0.9 -2.0 0.4

India -26.0 -1.2 -1.5 -7.6 0.0 -7.2 0.0 0.1 -1.3 -0.6 -0.6 0.9 -7.1

Malaysia -25.3 -0.1 0.1 -1.6 -1.3 0.1 0.0 0.0 0.1 0.0 -1.1 -21.8 0.3

Ireland -23.1 0.1 -0.6 0.0 -2.0 -20.0 0.0 0.1 1.0 0.0 0.1 -4.2 2.1

Thailand -17.6 0.1 -1.3 -1.6 -0.4 -0.8 0.0 0.0 -1.4 -0.3 -1.0 -10.2 -0.7

Switzerland -15.5 0.2 -0.8 -0.1 -0.5 -13.0 0.0 0.1 -1.6 0.2 -0.8 -3.4 4.3

Indonesia -11.1 -0.7 -0.9 -6.0 -1.2 -0.8 0.0 -0.2 0.2 -0.1 -0.5 -1.2 0.2

Israel -11.0 0.6 0.4 -0.2 0.0 -5.7 0.0 0.0 0.2 0.1 -0.1 -1.5 -4.9

Russia -8.8 -7.5 -0.2 0.0 0.0 -1.0 -1.2 -2.0 0.7 0.5 0.2 0.5 1.1

UK -8.2 -1.0 -0.3 -0.5 -0.2 -7.4 -0.4 0.0 0.4 -9.0 -0.1 -1.5 11.8

Taiwan -7.7 0.4 2.7 -0.8 -2.3 0.1 -0.8 0.2 -0.3 -2.2 -2.7 -5.3 3.2

Sweden -6.3 -0.1 -0.2 -0.1 -0.4 -0.8 -0.5 0.0 -1.7 -1.7 -0.3 -1.1 0.4

Venezuela -6.2 -9.0 0.6 0.0 0.1 0.6 0.1 -0.1 0.8 0.2 0.2 0.2 0.1

Sources: Chelem, Allianz Research

• China, Mexico, Germany, Japan

and Canada are top contributors to

US trade deficit. Machinery and

equipment, automotive, electrical

and electronic equipment.

• Looking at US-China trade

specifically, Electronic and Electric

products, textile are the first

contributors to US deficit and thus

could be next sectors targeted by

the US. For China, agri-food would

be the sector likely to be targeted

for retaliation. Financial services

and IP also at stake.


POTENTIAL EXPORT LOSSES

16

Total export losses by country, USD bn

Lingering protectionism: +2.5pp increase in tariffs


Trade war: +8.5pp increase in tariffs

Sources: Chelem, World Bank, Allianz Research, Euler Hermes

Kee, Nicita and Olarreaga (2008) Import Demand Elasticities and Trade Distortions.

(*) 25% on US imports of steel and 10% on US imports of aluminum for the remaining countries; 25% on USD60bn of US imports

from China and 25% on USD50bn of Chinese imports from the US and 15% to 25% on USD3bn Chinese imports from the US


Mild protectionism: ~ +0.5pp increase in tariffs (*)


REGIONAL OUTLOOKS


US: COSTLY PROFLIGACY AHEAD OF ELECTIONS

Upward revision of US GDP growth forecast (2018)

Upward revision of US GDP growth forecast (2019)

US twin deficits (as % of GDP)

-12

-10

-8

-6

-4

-2

0

2

4

-12

-10

-8

-6

-4

-2

0

2

4

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Current account deficit Budget deficit

Sources : Euler Hermes, Allianz Research

Forecast

Twin deficits will continue to widen in 2018.

Fiscal deficit will deteriorate to 4.5% in 2019

Fiscal hawks and free trade advocates may

chime (and take over) only after the mid-term

elections

CBO projections on US debt (as % of GDP)

0

20

40

60

80

100

120

0

20

40

60

80

100

120

1792 1830 1868 1906 1944 1982 2020

Debt sustainability at risk since it depends

on policy effectiveness


US: GROWTH, TAX CUT AND PROTECTIONISM – NOTHING NEW

Economic Indicators Reagan (1981-1989) Bush (2001-2009) Trump (2017-)

Growth 81-84 avg: 3.1% 85-88 avg: 3.9% 01-04 avg: 2.4% 05-08 avg: 1.9% 2.65% avg. 18-19

Inflation 10.30% 4.83% 2.8% 3.8% 2.2% (last 12 months)

Fed Funds 11,70% 7.22% 1.97% 3.78% 1.05% avg.

USD Index ~104 ~90 ~114 ~80 90.6

Federal Debt 31% of GDP 50% of GDP 55% of GDP 74% of GDP 104% of GDP

Fiscal def/surp -2.5% of GDP -2.7% of GDP +1.2% of GDP -3.1% of GDP -4.5% of GDP (2019e)

Unemp. Rate 7.5% 5.4% 4.2% 7.8% 4.1% (Feb)

Average import tariff 5.0% 5.5% 5.0% 4.0% 3.5% (today)

Fiscal policy (CBO estimates)

ERTA (1981) & TRA (1986) EGTRRA (2001) & JGTRRA (2003) TCJA (2017)

~$1.2tn fiscal revenue loss ~$1.5tn fiscal revenue loss ~$1.4tn estimated loss


THE AMERICAN CONSUMER: MUTED WAGES, PRICY

MORTGAGES, RISKY WEALTH EFFECTS

20

US conventional mortgage rates (% )

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

05 06 07 08 09 10 11 12 13 14 15 16 17 18


US

wage

growth

US Core PCE rate

Today2.6% (Feb

2018)

1.5% (Jan 2018)

Q4

2019

1980-

2017

sample

1980-

1990

sample

2007-

2017

sample

3.5% 2.8% 3.7% 2.0%

Price acceleration from 1.5% using different

wage/price elasticities

But faster wage growth will only gradually

translate into price growth, WSPS loop

partly looser

Sources: jaredbernsteinblog.com. Allianz Research

Mortgages rates are at the highest level since

2014

Puzzling mistrust towards the US.

Higher interest rates will create negative

wealth effects

Dollar effective exchange rate and 10Y US Treasury yield (%)

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

85

90

95

100

105

15 16 17 18

USD effective exchange rate (LHS)Forecast Dollar indexUS 10Y Treasury rate (%, RHS)Forecast 10Y US yield



Spring 2018:

Measures

for NPL reduction

October 2018: Brexit

transition

deal expected to be ratified.

Agreement on the EU

withdrawal

deal

November 2018:

EBA bank

stress tests

March 2019: Expected

ratification of

the EU exit withdrawal deal

of the UK.

Advanced trade talks.

By 2019: ESM becoming European

Monetary Fund; Common European deposit insurance

scheme; Single Resolution Fund

2019: European

fiscal

capacity

European

Rainy

Days Fund

Capital Market Union

2020:

Limi

ted FTA with

the UK

EUROPE: IMPETUS LIMITED BY REFORM FREEZE?

Spring

2018:

Measures

for NPL

reduction

October 2018:

Brexit transition

deal expected

to be ratified.

Agreement on

the EU

withdrawal

deal

November

2018: EBA

bank stress

tests

March 2019:

Expected

ratification of

the EU exit

withdrawal

deal of the UK.

Advanced

trade talks.

By 2019:

Common

European

deposit

insurance

scheme;

Single

Resolution

Fund

2019:

European

fiscal

capacity,

Eurozone

finance

minister

2020:

European

Rainy

Days Fund

2020:

Capital

Markets

Union

2020:

Limited

FTA with

the UK


EUROPE: CYCLICAL ECONOMIC RECOVERY MASKING

PERSISTENT POLITICAL DISCONTENT

22Sources: IHS DataInsight, EU Commission, Euler Hermes


UNITED KINGDOM: STRETCHED RESILIENCE

Companies plan to boost investment in

2018 after increasing it in 2017 as a

response to stronger external demand

Domestic investment surveyPositive – negative intentions (pp)

Sources: European Commission, Allianz Research

Saving rate, % of gross disposable income

Households have already used savings

to smooth the impact of declining real

purchasing power, but leeway to

continue doing so is very limited

Sources: ONS, Allianz Research

23

The services exports (along with the

manufacturing) continued to increase thanks

to increased competitiveness and strong

external demand

Services exports (% of total)



Household credit conditions, risk appetite in the next 3 months

Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17

Secured

lending0.7 -7.3 1.5 4.2 0.0 -7.7 5.7 2.0

Unsecured

lending 6.0 0.0 -0.5 -0.2 0.7 -7.0 -10.1 -14.5

NB: A positive balance indicates that more credit is available


Foreign Direct Investment

The UK’S appeal for foreign direct

investment has taken a hit while UK

companies invest more abroad

Household loans and credit conditions


Consumer Confidence

Sources: Eurostat, Allianz Research

Softer consumer confidence, albeit

less negative over the past months.

Higher interest rates by the BoE

(+50bp in 2018 to 1%) should weigh

on future expenditures

24

UNITED KINGDOM: VISIBLE DAMAGE


ITALY: IMMUNE TO POLITICAL RISK?

Sources: Thomson Reuters Datastream, Allinaz Research.

Tailwinds

� Favorable economic outlook for key

export markets – in particular EZ

� Investment activity finally recovering

� Positive labor market trend supporting

private consumption

� End of austerity. Primary balance surplus

Headwinds

� Elevated political uncertainty in the

aftermath of the 2018 election

� Fading monetary policy stimulus as ECB

continues QE tapering in early 2018

� Fragile banking sector struggling to

finance the economic upswing

� Rising protectionism

1.4%

1.2%

Real GDP growth (%) Italian 10-yr government bond yield & spread over

bunds, 5-yr credit default swaps

Sources: Thomson Reuters Datastream, Allianz Research.

Key takeaways from the elections:• Hung parliament: Center-right is the strongest political

force but without a majority

• More than 50% of voters supported populist parties

(M5S, Lega, FdL)

• Big gains for M5S and Lega at the expense of

mainstream parties 25


ITALY: AN UNFORTUNATE SEQUEL IS NOT OFF THE TABLE

26


Past stress episodes point to higher spreads but included a

substantial Italexit risk.

This time, financial stress, even in the case of a downside

alternative, should be contained by eurozone economic

and reform momentum , and ECB safety net

Impact of political uncertainty on Italian government bond markets Political scenarios in more detail

NB: Tail risk | 5% | Italexit



GERMANY: INVESTMENT CYCLE TO CONTINUE

27

Sources: Thomson Reuters Datastream, Allianz Research

Capacity utilization* (manufacturing, %) and investment (chain index, sa)

* Dotted line: Average since 1990

Above-average and rising capacity utilization

finally translates into higher investment spending

Construction sector: New orders (in current prices) and

production (2015=100, seasonally and calendar-adjusted)

In the construction industry, production cannot

keep up with the high level of orders. Wages are

on the upside: +5.1% y/y in Q4 2017



GERMANY: NERVOUSNESS AND CAPACITY BOTTLENECKS

28

Business expectations affected by stronger ERU, concerns

about US protectionism, and higher input costs (labor

mainly)

Ifo index: Manufacturing (2005=100)

Source: Thomson Reuters Datastream

Slowing employment growth partly due to declining

immigration and increasing labor market shortages: wage

were up +2.1% y/y in the manufacturing sector

Employment growth (%, y-o-y) and

jobless total (in thousands)



FRANCE: ON AIR, GROWTH WILL REACH +2.1% IN 2018

29

France: Business confidence and output France: Corporate investment and capacity

utilization rateFrance: Export gains by sector in 2018 (EUR bn)

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

60

70

80

90

100

110

120

08 09 10 11 12 13 14 15 16 17 18

Manufacturing confidence Index (left)

Manufacturing production index (YoY, 3-months moving average, right)

Supply is up. Manufacturing confidence went

to highest level since 2001, industrial output

followed and inventories contributed

positively to 2017 growth (+0.4pp)

Corporate investment on the rise, along with

capacity utilization ratio. Manufacturing prices

ended their 5-year long deflation.

Good export prospects for Eurozone

countries. French goods exports should grow

by +21bn in 2018. Aeronautics and agrifood

to benefit the most.

Sources: IHS Global Insight. Allianz ResearchSources: IHS Global Insight. Allianz Research Sources: IHS Global Insight. Allianz Research

65

70

75

80

85

90

75

80

85

90

95

100

105

110

115

08 09 10 11 12 13 14 15 16 17 18

Real corporate investment (Level, L)

Capacity Utilization Rate (%, D)

5.5

4.4

3.0

2.2

2.1

1.1

1.0

0.9

0.8

0.7

0.4

-1.0

-3 0 3 6 9

Machinery & Equipment

Agrifood

Textile

Vehicles

Electronic

Electric

Energy

Textile

Ferrous

Wood, Paper

Non-ferrous

Other Europe

North America

Latin America

Africa and Middle East

Asia

Oceania


FRANCE: THE TIES THAT BIND

30

Consumption is lagging production.

e.g. past strong production in automotive (+9%

y/y in 2017H2) ahead of car sales (+5%):

Increasing inventories should affect the output

Household confidence indented by concerns

over financial situation, higher prices, rates,

and taxes

Corporate Margins stalling at 31.8%, under

pre-crisis levels. Supportive tax policies

should be implemented over five-year plan

France: Household confidence, financial situation

-40

-35

-30

-25

-20

-15

-10

-5

0

08 09 10 11 12 13 14 15 16 17 18

Past financial situation

Expected financial situation

France: Automotive, expected vs. current production

50

60

70

80

90

100

110

120

130

140

150

-120

-100

-80

-60

-40

-20

0

20

40

60

80

08 09 10 11 12 13 14 15 16 17 18

Expected production (L)

Current production (index, R)


France: Corporate margins

25%

30%

35%

40%

45%

50%

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

ManufacturingLow-skilled ServicesConstructionBusiness ServicesInformation&CommunicationTotal

Sources: IHS Global Insight. Allianz Research Sources: IHS Global Insight. Allianz Research

30


Deleveraging: Debt growth is decelerating

for the corporate sector. Households debt

continues to rise

Reduction in excess capacity: The

mining industry continues to adjust with

further cut in excess capacity

SOE restructuration: corporates

bankruptcies went up +73% in 2017 as

court speed up the handling of zombies

companies

CHINA: QUALITY GOES FIRST

31

Debt by agent (% GDP) Investment and producer prices in mining Corporates bankruptcies (yearly growth)

Sources: IHS, Euler HermesSources: BIS, Allianz Research Sources: IHS, Allianz Research

-40

-30

-20

-10

0

10

20

30

40

12 13 14 15 16 17 18

Producer prices in mining (y/y)

Urban Investment in mining (YTD y/y)

50

100

150

200

250

300

12 13 14 15 16 17

Households

General Government

Non-Financial Corporations

-40%

-20%

0%

20%

40%

60%

80%

2007 2009 2011 2013 2015 2017


Profits: Corporates have leeway's to

finance their growth

Capital: Growth to hinge further on non-

credit intensive activities

Households: Consumption to remain firm

underpinned by solid income growth

CHINA: LANDING SOFTLY

32

Industrial profit and revenue Investment by sector Households income and retail sales

Sources: IHS, Allianz Research Sources: IHS, Allianz Research Sources: IHS, Allianz Research

-20

-10

0

10

20

30

40

12 13 14 15 16 17

Total industrial profits (YTD, y/y)

Industrial revenues (YTD, y/y)

0

5

10

15

20

25

30

12 13 14 15 16 17 18

Nominal investment in the secondaryIndustry (YTD, y/y)

Nominal investment in the tertiaryindustry (YTD, y/y)

Total


China is stepping up long-term investment

abroad as part of its Belt and Road Initiative

(BRI). Recent moves includes plans in Malaysia

(rail), Sri Lanka (shipping), in Nepal

(construction)

Current account surplus to continue to

reduce as the opening of the domestic

market leads to higher imports

Capital account to open further but mind the

sequencing

CHINA: OPENING UP

33

China’s overseas investment and construction activity by region (USD bn)

Current account balance (% of GDP)5 recommendations for successful

capital account liberalization

* Estimates at end 2017

Sources: AEI. China global investment tracker Sources: IHS, Allianz Research Source: Allianz Research

693

1085

0

200

400

600

800

1000

1200

2005-2012 2013-2017

RoWNorth AmericaEuropeMEAAsiaTotal

OBOR

regions

1. Strong financial institutions (FI) and

transparency

2. Improvement in financial literacy

3. Healthy and modern financing system

will be pivotal

4. Gradualism and cautiousness; but no

“stop-go” policies

5. Sequencing of reforms (domestic

financial system then opening up)

1.4%

1.0%

0%

2%

4%

6%

8%

10%

12%

08 09 10 11 12 13 14 15 16 17 18


EMERGING MARKETS: SURFING THE CYCLE

34

Growth differentials should widen a bit in favor

of EMs, particularly in 2019: a reasonable bet

for EM exchange rates marginal appreciation

Net capital flows

(excl. China and Russia, USDbn)

Financial conditions are supportive as well:

Capital flows went to their highest level in the

last 10 years in January. Inflation surprises in

Advanced Economies matter


Current Account Balance

% of GDP


Key EMs are better positioned now, since

their current account imbalances reduced.

Exceptions: Argentina and Turkey

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Arg

entin

a

Bra

zil

Chi

na

Indi

a

Indo

nesi

a

Kor

ea

Mex

ico

Pol

and

Rus

sia

Sou

th A

fric

a

Tur

key

2012

2017

80

85

90

95

100

105

110

115

120

125

130

0

1

2

3

4

5

6

7

03 05 07 09 11 13 15 17 19

Growth differential (left)

Exchange rate (right)

Appreciation

%


Growth differentials (AE vs. EM) and EM exchange rate


35.6

32.5

7.9 8.5

0.62.3

5.5

-10

-5

0

5

10

15

20

25

30

35

40

Q4-

2016

Q4-

2017

Q4-

2016

Q4-

2017

Q4-

2016

Q4-

2017

Q4-

2016

Q4-

2017

Q4-

2016

Q4-

2017

Q4-

2016

Q4-

2017

Q4-

2016

Q4-

2017

Mexico Brazil Peru Chile Argentina Ecuador Colombia

Othersto Brazilto Russiato EUto USAto ChinaTotal export gains

• Regional acceleration: +1.2% 2017, +2.3%

2018, +2.8% 2019. Brazil, Mexico and

Argentina should drive 75% of regional

growth

• Mind political risk: elections and NAFTA

renegotiation for Mexico; elections in Brazil

• Lower inflation (except in Argentina)

supports internal demand and allows

more accommodative monetary policy

(Brazil, Colombia, Chile)

• Better financial conditions: lower spreads,

better-performing stocks, eased bank

lending conditions

• Higher commodity prices and the

acceleration of global trade have boosted

external demand

• Mexico (USD35.6bn) and Brazil (32.5bn)

show the highest export gains after a

weak performance in 2016

LATIN AMERICA: OPPORTUNITIES INSIDE AND OUT

35

2017 20192017 2019

2017 2019

2017 2019

2017 20192017 2019

2017 2019

2017 2019

A1

B3

D4

Brazil

Venezuela

Argentina

Chile

BB1Peru

Colombia

BB2 Mexico

BB2Uruguay

3.2%2.9%

2.7% 2.6%

2.5%1.0%

1.5%

3.1%

2.5% 3.3%

BB2

1.8% 2.4%

2.0% 2.5%

-12.0-6.0%

C3

2017 2018

Low risk

Medium risk

Sensitive risk

High risk

2019

2.3%

3.1%

4.0%

3.2%

3.0%

2.8%

3.0%

-2.0%

2017 2018 2019

2017 2018 2019

2017 2018 2019

2017 2018 2019

2017 2018 2019

2017 2018 2019

2017 2018 2019

Export gains (over 4 quarters)Country risk and economic growth

Sources: IMF, Euler Hermes, Allianz Research Sources: IIF, Euler Hermes, Allianz Research

Real interest rates (%)

Sources: Universidad Torcuato di Tella, Euler Hermes, Allianz Research

-4%

-2%

0%

2%

4%

6%

8%

Argentina Brazil Mexico Colombia Chile

End 2012

End 2017


• The Mexican paradox: acceleration in

2018 (US effect) but complicated 2019

• Financial flows, the peso, and trade could

be affected by NAFTA and the outcome of

the July presidential election.

• Monetary policy tightened to support

currency and follow the Fed

• Heterodox Argentina? In spite of high

inflation (25%), Central bank eased again

to help export growth (ARS depreciation)

• Current account deficit at -4.8%, widest in

30 years makes Argentina vulnerable to

global risks

LATIN AMERICA: MIND THE B.A.M.Mexico: exchange rate (MXN/USD)Argentina: inflation and policy rate (y/y, %)

18.5

17

18

19

20

21

22

23

Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18

4th round NAFTA negotiations and fear of termination

More encouraging NAFTA developments

Electionof Donald Trump

0

5

10

15

20

25

30

35

40

45

50

15 16 17 18

Inflation rate

Key policy rate

Sources: IHS, Euler Hermes, Allianz ResearchSources: IHS, Euler Hermes, Allianz Research

• Political transition brought growth back

but political capital may be too limited to

pass transformative policies

• Public finances, protectionism (highest

number of tariffs > 10%) and red tape

continue to weigh on economic results

36

40%

45%

50%

55%

60%

65%

70%

75%

80%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

07 08 09 10 11 12 13 14 15 16 17 18

Gross general government debt (% ofGDP, right scale)Fiscal balance (12m, left scale)

Primary balance (12m, left scale)

President Temer's

mandate

Brazil: public debt, fiscal and primary balance (% GDP)

Sources: IHS, Euler Hermes, Allianz Research


IS EMERGING EUROPE OVERHEATING? A REALITY CHECK

37

• Accelerating GDP growth combined with tightening labor markets and a rebound in inflation has fueled concerns of overheating in Emerging

Europe.

• Yet, a closer look shows that only Romania and Turkey are seriously overheating. In Romania, inflation continues to rise and fiscal and current

account deficits are rapidly widening. In Turkey, large economic imbalances are not unusual and reflect persistent high country risk, but they are

currently widening more and more due to policy mistakes.

• Elsewhere in the region, inflation has leveled off in the meantime and economic fundamentals have remained stable.

Overheating guide for key Emerging European economies

Sources: National statistics, IMF, Eurostat, IHS Markit, Allianz Research

Real Economy

(2017e)(Change since

2013)(Feb 2018)

(Increase since end-2016)

Poland 45% 5.0% (-5.3pp) 4.8% 1.4% +0.6pp 3.0% -2.0% 1.6% -0.8% 388%

Czech Republic 128% 3.0% (-4.0pp) 7.1% 1.8% -0.2pp 5.0% 1.0% 2.3% 0.6% CA surplus

Romania 107% 5.3% (-1.8pp) 13.2% 4.7% +5.2pp 6.7% -3.2% 3.0% -3.6% 71%

Hungary 142% 4.2% (-6.0pp) 7.6% 1.9% +0.1pp 2.4% -2.5% -3.0% 3.5% CA surplus

Slovakia 14% 8.3% (-5.9pp) 4.1% 2.1% +1.9pp 9.7% -1.5% -0.2% -1.0% 723%

Bulgaria 75% 6.4% (-6.6pp) 7.8% 2.0% +1.9pp 4.4% 0.0% 3.5% 4.8% CA surplus

Turkey 29% 11.3% (+2.5pp) 13.5% 10.3% +1.8pp 20.5% -3.2% 3.0% -5.5% 15%

Indicating low overheating risk Indicating significant overheating riskIndicating moderate overheating risk Indicating high overheating risk

GDP growth (2017 deviation from long-term

trend)

Unemployment rate Nominal wage growth (2017)

Consumer price inflationFiscal balance

(2017e)

Public spending growth (2017e)

Current account balance (2017e)

FDI / CAD (Latest)

Labor Market Monetary Policy Fiscal Policy External Sector

Private sector credit growth (Latest month)


TURKEY: RISING CURRENT ACCOUNT DEFICIT AND NFC DEBT

38

0

10

20

30

40

50

60

70

80

05 06 07 08 09 10 11 12 13 14 15 16 17

LCU Other EUR USD

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

EM 25-75 percentile range

EM median

Turkey

Current account deficit (% of GDP) Currency breakdown of NFC debt (% of GDP)

• In Turkey, the current account deficit is rapidly widening, in contrast

to most other EM.

• The 12-month rolling external shortfall reached –USD52bn in

January 2018, up from –USD47bn in December (~ -5.5% of GDP) and

–USD34bn in January 2018.

• Only 15% of the deficit is covered by net FDI inflows. The remainder

has to be financed through ST foreign capital inflows.

• The corporate debt burden in Turkey has continued to rise and

reached 69% of GDP in Q3 2017. This is a 29pp increase since

end-2010.

• Rolling FX-denominated debt of NFCs – accounting for 37% of

GDP – could prove challenging if investor confidence weakens

Sources: National statistics, IMF, IIF, Allianz Research


AFRICA AND MIDDLE EAST: PROCYCLICAL THEY ARE

39

2015 2016 2017 2018 2019Africa* 3.4 2.0 3.3 3.8 4.2

North* 3.9 3.2 3.5 3.6 3.9Algeria 3.7 3.3 2.2 2.5 3.0Morocco 4.5 1.2 3.8 3.0 3.0Egypt 4.4 4.3 4.2 5.2 5.8Tunisia 1.1 1.0 1.9 2.5 2.5

West 3.0 0.0 2.5 3.9 4.5Cote d'Ivoire 8.9 7.7 7.6 8.0 8.0Ghana 3.8 3.5 7.9 9.0 7.5Nigeria 2.7 -1.6 0.8 2.5 3.5

East 7.2 6.2 6.1 6.9 6.9Ethiopia 10.4 8.0 8.5 8.5 9.0Kenya 5.7 5.8 4.8 6.5 5.7Tanzania 7.0 7.0 6.5 7.0 7.0

Central 2.8 0.5 1.1 1.9 2.5Cameroon 5.8 4.7 4.0 3.5 3.5Congo, DR 6.9 2.4 2.5 3.0 3.0

Southern 3.1 1.0 2.4 2.6 3.5South Africa 1.3 0.6 1.3 2.0 2.5Angola 3.0 -0.7 1.0 1.5 1.5Zambia 2.9 3.4 3.8 4.3 4.5

*Egypt is included to Africa; Lybia excluded from regional average

Growth in Africa, per region

Sources: Allianz Research

40

42

44

46

48

50

52

54

56

58

60200

300

400

500

600

700

800

11 12 13 14 15 16 17 18

Emerging Markets' exchange rate (vs. USD, right)

Commodity prices (S&P GSCi, left)

Depreciation

Higher commodity prices to ease the

pressure on exchange rates but exposure to

reversals remain quite high in the region.


Commodity prices vs. EM exchange rate

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10 11 12 13 14 15 16 17 18

South Africa: Retail salesy/y, 3-months moving average


Growth to recover in Africa, particularly in

key economies. Commodities to be the 1st

driver behind growth acceleration

South Africa to register +2% GDP growth in

2018, its highest growth since 2013. Low

inflation (+4%) to support the consumer.

Confidence depends on policy moves


ASIA: THREE CLUSTERS FOR GROWTH

40

JapanA1

ChinaB2

Hong KongA2

TaiwanA2

ThailandB1

South KoreaBB1

MalaysiaBB2

SingaporeAA2

IndonesiaB1

5.3%

AustraliaAA1

PhilppinesB1India

B1

Low riskMedium riskSensitive riskHigh risk

APAC: 4.8%

ASEAN -6*

1.2% 3.0%

3.0% 2.6%

2.4

2.8%

New Zealand

AA1

6.5%

6.8%7.3%**

3.6%

5.0%

2.9%

5%

• Economic growth is set to rise above trend thanks to better exports prospects and a positive investment cycle

• Vietnam, Indonesia, Philippines and India would top the league thanks to dynamic domestic markets and strong competitive advantage

The Accelerators: India and Emerging ASEAN

• China and Japan are expected to grow at a slower but healthy pace

• In China, tighter financing conditions will help reduce financial risks, favorable fiscal policy and strong consumption will support growth. In Japan, high corporate profit margins will act as a driver for private domestic demand.

The Stabilizers: China and Japan

• Smaller and more open, these economies are expected to grow at a firm pace (2% to 3%) benefiting from solid exports growth.

• Policies would focus on averting financing risks stemming from high private debt and monetary tightening in advanced economies

The Connectors: Singapore, South Korea, Hong Kong, Taiwan. Australia and New Zealand

2018 growth rates. **Fiscal year

Sources: Allianz Research


ASIA: FINANCIAL TIGHTENING AND TRADE VULNERABILITIES

41

Monetary policy USD denominated goods exports growth (3m y/y)

Monetary policy to tighten gradually as authorities look to avert

debt- and inflation-related risks. South Korea and Malaysia lead

the pack. China started using atypical tool (regulatory and non

official policy rate)

Despite protectionism rhetoric, exports are still growing at a

fast pace for now. A deceleration is expected in H2 as

China’s demand growth slows and tariffs are implemented

(steel and metal, e.g.)

Sources: IHS, Allianz Research

Monetary policy rates (end year)

17 18 19

Australia 1.50 1.75 2.00

China 4.35 4.60 4.85

Hong Kong 1.75 3.75 4.00

India 6.00 6.00 6.25

Indonesia 4.25 4.25 4.50

Japan -0.10 -0.10 0.10

South Korea 1.50 1.75 2.00

Malaysia 3.00 3.25 3.50

Philippines 3.00 3.25 3.50

Singapore* na na na

Taiwan 1.375 1.375 1.500

Thailand 1.50 1.50 1.75

*SGDNEER slope to increase as disinflationary pressures dissipate-30%

-20%

-10%

0%

10%

20%

30%

40%

11 12 13 14 15 16 17 18

China South Korea

Singapore Japan

Sources: National statistics, Allianz Research


THANK YOU!

Ph

oto

by

ra

wp

ixe

l.c

om

on

Un

spla

sh

Economic Research Department

05.04.2018

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